A great and thoughtful article which brought a great book to mind: "Extraordinary Popular Delusions and the Madness of Crowds" written by Charles Mackay in 1856 (?) which should be required reading for all investors as its lessons are as valid today as they were when the book was written.I hold (and do not trade) gold because I believe that the global financial system has passed a point of no return with mountains of debt that can never be repaid. It is my view that it is only a matter of time before enough people realize that this debt is greatly overvalued to start running for the exits, at which point liquidity will evaporate and that will collapse the international banking system. If I am correct, then whatever happens to the price of gold in the interim doesn't really matter.

I believe that those who anticipate runaway inflation and a weak dollar are wrong. I believe that the great danger is quite the opposite: deflation. I also believe that few, other than central bankers who clearly fear deflation more than anything else, have given much thought to this as a possible outcome and they should.In a deflation, cash becomes king and strong currencies get stronger as people anticipate lower prices. Once this gets going, repaying debts becomes increasingly onerous and defaults multiply. In such an environment, the obligations of others become suspect. People search for assets other than obligations of others and in this environment gold becomes attractive because of its liquidity. That is the real argument for holding gold.

Deflation is all about defaulting debt. It is not a new phenomenon, but one that is neither well understood nor appreciated today, probably because the last one was so long ago. It reminds me of the '70's when nobody (except Volker and Friedman)could understand why it was happening. Some espoused cost push and others demand pull. As it turned out it was a monetary phenomenon and was stopped dead with high interest rates. Unfortunately, low interest rates do not stop deflation; in fact nobody knows what stops deflation. I think the it just burns itself out - and, not incidentally, destroys the debt that was burdening the economy. It's not pleasant medicine, but it works.

It is possible (and I think likely) that deflation is what lies ahead and a stronger dollar is consistent with that view. That is because in a deflation cash increases in value based on the expected declines in the prices of goods and services. The big problem with deflation is that debt service becomes more onerous and, as a result, causes an increase in debt defaults. That, in turn, causes people to invest in assets that are not someone's debt and gold is, among other things, just that. Indeed, economic history shows that to be the case.Right now, investors think of gold as a hedge against inflation - as it was in the late '70's and early '80's - but now it is a hedge against the ravages of deflation.

The problem, as I see it is one of excess debt and excess debt is debt that can never be repaid. When there is excess debt, the usual reaction is to reduce its value through inflation. If that doesn't work, Mr. Market steps in and causes debt to default by refusing to refinance it. That process reduces the excess debt just as surely as inflation, but also causes a depression. The correct response to that is to devalue (depreciate is the correct word) the currency, but that is often difficult to do when everyone is trying to do the same thing. If you have a lot of gold as we do, then you can devalue against gold and those without gold cannot follow.My view is that the forces at work now will force us to return to a gold standard.

As you no doubt know, "money" is created by both the Fed and the banking system. Recently, the Fed has been creating like crazy and the banks have been destroying like crazy. As you also probably know, most of the "money" in the system is the result of bank lending and not Fed "printing". I would add that you can't look at the money supply without looking at velocity (which is near all time lows). Bottom line, there is no inflation now because there is little net money creation. That's why i believe deflation is more likely than inflation.

I beg to disagree. Two things happen in a deflation: the currency strengthens and gold rises - indeed in every deflation that I am aware of devaluation of the currency against gold was used as the way out of deflation. Indeed, devaluation used to refer to changing the gold value of the currency. Changing the value against other currencies was called depreciation.The reasons are simple: As prices fall currency buys more goods and services; debt becomes suspect as it is defaulting and gold is not someone else's debt.

The only reason for a sustained rise in gold will come from the financial markets and it will come in the form of an economic crisis. Stuff like what is going on in the Ukraine is not going to do it. Either we will have massive inflation or, in my opinion, more likely deflation. Either will send gold skyrocketing. The rest is just noise. The underlying issue is excessive levels of debt and the only way to reduce them is through inflation or deflation. Right now, we are waiting for "the straw that breaks the camel's back".

I think that the correct question is what catalyst will make gold go up; two come to mind: inflation and deflation.

Events, like Crimea, the Ukraine etc. are not likely to have long term interest. If you look over history, you will see that the real drivers behind gold prices are significant economic events. If the economies of the free world are functioning well even significant political events don't have much of an impact.

To the extent that you are not concerned about the levels of debt in the free world, I can see no reason to hold gold; to the extent that you are then gold should be in your portfolio as insurance.

A study of history will show that there are periods of substantial appreciation against currency and long periods when it does not appreciate (and may fall) against currencies. Typically, the appreciation comes when a currency is no longer a store of value (e.g. during an inflation). The trick is to understanding the macroeconomics of the period. I would say that it is the only liquid asset that is not someone else's liability.

Gold is an asset that strikes me as unsuitable for trading. That's because, as many pundits have pointed out, it does not have earnings, pay a dividend, or have an industrial or commercial value that would drive its price.The price of gold does, however, respond to unsettling political and economic events, serving as an asset that represents a safe haven in such times. As a result, instability in the Ukraine, the Middle East and elsewhere will tend to cause gold to rise and fall in response to events that are, to some extent, unpredictable and random.The real reason to buy gold is as insurance against potentially catastrophic events in the financial markets. Presently, the developed world has an unsustainable debt burden that continues to increase and bubbles in the financial and real estate markets - driven largely by cheap debt.History tells us that when debt becomes unsustainable it is forcibly reduced by either inflation or deflation and, so far, no other alternatives have been found.Those who understand gold know that it serves as a safe haven in both cases. In an inflation, the value of currency and debt fall; in a deflation, currency will be strong, but debt will fall because it becomes increasingly costly to repay and much of it will default.To the extent that one fears neither inflation or deflation, holding gold probably doesn't make much sense.

A Brief History Of Gold And Why It's Overvalued By A Factor Of 2 [View article]

Short-term predictions are the hardest to make, but that is less the case with the longer term. Imbalances tend to get corrected over time and being able to to identify such imbalances significantly improves one's overall success, even though the timing may be wrong. I would also argue that avoiding large losses is more important than making small gains.I would also note that no investment or investment strategy works all the time. There are times to own particular investments and times not to. That is the case with gold.

A Brief History Of Gold And Why It's Overvalued By A Factor Of 2 [View article]

That's my point. You need to think of gold as a currency. That's how it is priced.So far, you are only thinking about inflation and I think you now agree that its "value" is relative to the currency that it is priced in. Step two is to recognize that if say, the Argentinians are buying gold, then there will be lees of it available for others to buy and that will raise its value in other currencies. Step three is to recognize that it will also have value in a deflation.